Sydney property market has underperformed in 2018. The values have dropped significantly from the peak. A lot of people see that as an issue. Headlines like “Property market crash”, “Property collapse” and similar are on front-pages of the newspapers. However, is it really an issue? What bleads attracts readers, we need to keep in mind that newspapers make money through increasing their readership and it is not always the case that newspaper articles about property are objective or without exaggeration.
Sydney property market did correct, as we can see from below graph Sydney property market has corrected. However, it is not the first time it has corrected. Economies, prices, companies and property prices go through cycles. Property prices follow cycles of boom, bust and “sideways” rest phase. It is not sustainable to be on constant growth trajectory. If that does happen property prices would become out of reach and market would dry up. Let us look if this bust cycle is special.
NSW has exhibited the fourth largest population growth in percentage terms among all Australian states and territories. It is important to remember that NSW comes of a much larger base, so a small percentage increase in NSW is thousands of people.
NSW remain an attractive proposition for overseas migrants, and as long as people keep coming to Sydney and settle in Sydney permanently, we believe the demand for property would continue. Demand for property is both a renter (new immigrant usually) or a homeowner (established local or immigrant).
While Sydney is losing interstate migration war and bleeding population to QLD and VIC, the interstate migration remains fairly benign if you consider a large number of overseas immigrants coming to Sydney. An issue with interstate immigration is this demographic tends to be established and well cashed up, so losing interstate immigrants means losing wealth to other states. In recent years, the proportion of overseas immigrants has increased rapidly to Melbourne and lesser extend Brisbane. If the trend continues, we are running a possible risk of Sydney not being the top magnet for international migration which would call us to revise our thesis in regards to the property market in this city.
Here is the strength of Sydney and we believe NSW economy will support Sydney property prices in the long term. The state government embarked on unprecedented infrastructure spending. Over $80 Billion is being spent. We also are mindful of a large number of federally funded infrastructure including, but not limited to, inland rail project that will be majority spent in NSW.
NSW, and Sydney by large, has one the lowest unemployment rates in the country and some of the highest participation rates in the country. Good employment prospects and tightening job market is usually a good indicator of sustainability of property prices. Our view is further supported by low level of delinquencies in NSW. While affordability in Sydney property market remains an issue. We see affordability improving should inflation rate increase and should the market correct further in 2019.
Vacancy rates continue to trend up. In fact in December and January, a lot of vacant properties hit Sydney rental market, which resulted in a much higher vacancy rate in a long while.
We believe that 2019 is not the year for Sydney property market. We expect the market to continue its downward trend, albeit not as profoundly as in 2018. The changes in Federal government, negative gearing and sentiment would continue to place downward pressure on Sydney property prices. Sydney is a fantastic city with a lot of outstanding metrics. However, we believe that the boom overshot significantly the expected property values, which would either require the prices to pull down a bit more or the workforce to receive a significant pay rise. It is unlikely we would see wage inflation anytime soon, so our thesis remains that Sydney property would continue to be down in 2019.